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Tuesday, July 1, 2014

Dow barely eked out a record on manufacturing data and auto sales

Dow jumped 129 (good enough for a new record), advancers over decliners just 2-1 & NAZ rose shot up 50. The MLP index added another 2+ to the 526s & the REIT index went up 1+ to the 304s. Junk bond funds settled back & Treasuries were sold as the stock market rallied. Oil slid lower & gold advanced, up from the mid 1200s just a month ago.

American factories, propelled by the
strongest orders of the year, sustained gains in Jun. The Institute for Supply Management manufacturing index was 55.3 last month, little changed from a 5-month high of
55.4 in May. Readings greater than 50 indicate expansion. Producers of wood products, furniture, metals & machinery
were among those seeing a pickup in demand as gains in auto &
home sales rippled thru the economy. Factories globally were also mostly on an upswing, figures
today showed. In China, the world’s 2nd-largest economy,
manufacturing grew in Jun at the fastest pace of the year,
according to a gauge from the National Bureau of Statistics &
China Federation of Logistics & Purchasing. In the UK, manufacturing expanded in Jun at the
strongest pace in 7 months, according to Markit Economics. But factories in the 18-nation euro area cooled last month, as a
deepening downturn in France offset a pickup in Spain, other
Markit data showed.

OPEC crude production climbed for a 2nd month in Jun as gains in Saudi Arabia & Nigeria made up for the loss of Iraqi barrels. OPEC production rose 278K barrels a day to 30.2M. Last month’s total was revised 43K barrels a
day lower to 29.9M because of changes to the Kuwaiti, Libyan & Ecuadorian estimates. Violence flared in Iraq, OPEC’s 2nd-biggest producer, this month as a militant group seized Mosul,
the country’s biggest northern city, and advanced south toward Baghdad. Fears that the upsurge may ignite a civil war sent prices higher. Iraqi production tumbled 400K barrels a day to 2.9M this month, the biggest drop since Jun & left the country pumping
the least oil since Sep. The fighting hasn’t spread to southern Iraq, home to about 75% of the nation’s oil output. Production cuts occurred in the north, where the pipeline from Kirkuk to Turkey has been shut since Mar because of sabotage. The
missing output would have supplied Iraqi needs. The 310K-barrel-a-day
Baiji refinery, Iraq’s biggest, has been closed since militants first
attacked it on Jun 15. Saudi
Arabia, the group’s biggest producer, boosted output by 230K barrels a
day to 9.9M. That was the highest level since Sep, when
it pumped 10M barrels a day, the most in monthly
data going back to 1989. Fuel consumption in the Arabian
peninsula peaks in the summer months, when high temperatures lead to
increased use of air conditioners. Saudi
Arabia is pumping additional oil for storage to keep the market
comfortable about supply. It has been estimated that the country holds 2.6M barrels a day of
spare crude production capacity.

As Russia & Iran step in to bolster the gov in Baghdad, pres Obama has no good options to help defeat the al-Qaeda splinter group that’s proclaimed an Islamic caliphate in Iraq & Syria. The
White House has offered limited military assistance to Shiite Prime
Minister Maliki & is pushing for a coalition govt to
unite Iraqis as Sunni fighters from the Islamic State & their allies
pose what Sec Kerry calls “an existential threat” to Iraq. While
it’s in the US interest to prevent one of the largest Arab states,
the 2nd-biggest crude oil producer in OPEC that’s bordered by Syria & Iran, from falling into the hands of the Sunni militants, it’s not
clear what Obama can do to vanquish a militant group that may control
10K fighters & $2B in assets. Iran
has deployed hundreds of troops from its elite Islamic Revolutionary
Guard to reinforce its Shiite ally, & Russia last week delivered
the first Sukhoi fighter jet to Maliki the day after vowing that it
won’t stand by while Iraq collapses. Now, the administration is exploring a 3-pronged strategy. It consists of providing Maliki’s gov with limited
military aid, pressing him to step down or agree to a more inclusive
gov & trying with Saudi Arabian assistance to pry Sunni
tribesmen away from their de facto alliance with the Islamic State. In short it's a mess & nobody knows what to do.

Factory data & good enough auto sales brought out buyers in droves. But market breadth was not impressive & volume was only so-so. Yield securities continue to do well, even dull munis. Investors scramble to lock up these yields as the low yield environment drones on. In the last 4 years, the Alerian MLP index has doubled! That is one of the best performances of anything over 4 years. While that feels good for security holders, straight up is scary.

Dow Jones Industrials

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